ECONOMIC AFFAIRS: Why a carbon tax is self-defeating

Before a couple of international calamities intervened, global warming and, in particular, the merits or otherwise of a “carbon tax” were dominating the local media.

Prime Minister Julia Gillard is apparently convinced that we must have a tax on anthropogenic carbon dioxide emissions in order to combat climate change. By a small margin, the rest of us seem to disagree.

The PM makes no apology for the fact that her new discovery breaks an election promise. Nothing too strange about that! These days, prime ministers and state premiers routinely do this.

Ms Gillard, however, goes a step further. As leader of a minority government, she says she had no option but to give in to the Greens. Really? Surely, she held all the cards.

What option did the Greens have? Call another election when either Ms Gillard would win a majority, or, worse for them, the Coalition would take office?

The Prime Minister was also forced to call her carbon tax a tax. Why should she be so coy? Australian governments these days seem intent on proving they can run countries almost without the benefit of taxation — while, at the same time, supporting an open-ended immigration policy, keeping the budget in year-by-year surplus, and maintaining necessary levels of public infrastructure — and even contriving tax cuts.

Simple arithmetic contradicts them, but they keep insisting they can do the impossible. Some members of the public apparently believe them, which makes the push for a carbon tax that much harder.

But let us move on. Accepting for the moment, if only for the purposes of argument, that there is a need to do something about carbon dioxide emissions, how well thought out is the government’s current proposition? More importantly, is it likely to achieve what is being claimed for it?

On the basis of what we know, it is hard to be positive. The proposal seems to be riddled with internal inconsistencies — in some circumstances, to the point of one policy objective contradicting another.

We are told, for example, that a carbon tax will act as a disincentive to the production of emissions. Let us follow the argument using electricity produced from coal as our example.

If a tax is imposed on carbon dioxide emissions by electric power generators, then the cost of any downstream products that rely on inputs from electric power will rise. The immediate consequence, it is assumed, will be a fall in demand for electricity and a lower volume of carbon dioxide emissions.

All other things being equal, that of course is one possibility; but there are other possible outcomes — even before we consider compensation arrangements.

Households, for example, may choose to pay more and retain present levels of power consumption, in which case many households will need to curtail other areas of consumer spending.

We cannot know whether this change in consumption habits will add to or reduce carbon dioxide emissions. What we can know is that lower spending in these other areas of the economy would impact adversely on both employment and overall economic activity.

The government has been assuring us that none of this will be allowed to happen, but without revealing how they can prevent it.

Professor Ross Garnaut recently threw the government a lifeline with his suggestion that part of the carbon tax proceeds be used to give households tax concessions to offset higher electricity prices. Not surprisingly, a grateful government warmed to Garnaut’s idea.

But wait a minute! If households are compensated, will they not maintain current levels of electricity consumption? In other words, rebating consumers for higher electricity consumption will diminish, or perhaps totally destroy, the purpose of the tax. Coal consumption, and the consequent carbon dioxide emissions, will remain unchanged.

The same surely applies to business users of electricity. Their customers will be forced to pay more if electricity prices rise. However, if consumers are compensated further to offset these rises, then, theoretically, all of the tax collected will have been redirected to households to ensure that they will be no worse off.

In that event, a tax on carbon dioxide emissions from coal will have had no effect. And, if that is to apply to the electricity-generating sector, we must assume it will apply across other “polluting” industries. The tax will have been collected and redistributed to no purpose.

The obvious conclusion is that a tax which is applied for the purpose of compelling a reduction in carbon dioxide emissions, cannot be allowed to provide for exclusions or compensation.

Moreover, if Labor is to be consistent, it should apply its policy to the export sector as well. After all, when Labor in the past insisted that manufacturing and agriculture should lose all government support and become internationally competitive, it did not offer these sectors any tax breaks to offset local cost disabilities.

Prime Minister Gillard keeps telling us that Bob Hawke and Paul Keating were prepared to take tough decisions. She parades as examples their dismantling of tariffs, their floating of the exchange rate and their deregulation of financial markets, and claims that we and our economy have reaped the benefits.

Given what has happened globally since 2007, it surely is debatable whether that is still correct.

Besides, the present PM is not following the Hawke/Keating example on climate change.

Household compensation for any discomfort arising from the transition to free-market economic liberalism was no part of the Hawke/Keating plan, or that of their then key advisor Professor Garnaut.

The message was simple. Tariff reductions would benefit everyone. All of those industries and the jobs that went with them were well in decline. New industries, with accompanying jobs, would automatically emerge to take their place, so the nation and the economy would be better off.

Prime Minister Gillard, if she was following suit, would be making the same point. Those industries and households disadvantaged by policies to combat climate change would be replaced by newer and better industries — except that this time round it is much harder to sell.

Hawke and Keating were right, actually. New industries and jobs did in fact emerge as a result of their brand of economics — but in other countries, not in Australia!

Of all the workers displaced by import competition in our manufacturing industries, only about 30 per cent ever found well-paid, reliable work again. Many remained unemployed for the rest of their working lives.

The unspoken hope of the Hawke/Keating governments was to decimate manufacturing. Former federal Labor leader Mark Latham continues to make that clear.

The government of the time and those backing it got what they wanted — a major shift in our economy away from manufacturing and towards mining and services. The most dedicated of them also believed, and continue saying so, that stimulating a greater volume of cheap imports, so far as our economy is concerned, is somehow a virtue in itself.

Much of this found a sympathetic hearing among sections of the business community — especially when reminded that, once tariffs had been dismantled at home, they would be free to move offshore in search of cheap labour.

With Labor’s academic supporters assuring the government that the same economic transformation was occurring in Britain and North America, Hawke and Keating pragmatically adopted it as official Labor Party policy.

Amazingly, their program even included curbing union power and dismantling traditional and long-standing wage-fixing policies. Much of what was done at the time could never have happened without the active support of key union figures, and a trusting union support base that believed the rhetoric of its union leadership and the Labor Party.

But even supporters of change, within academia and the bureaucracy, were ill-prepared for some of the fallout from the ideas they had so strenuously promoted.

Cutting taxes and tariffs, and other free market nostrums, would, they believed, create some kind of magic pudding. Following in its wake, among other things, would be a re-balancing of Australia’s crippled trading account.

The reverse happened. Cheap imports merely sharpened the appetite of consumers for more. They, and the nation, began accumulating debt.

The more the government sold off public assets, the more the private sector’s debt soared. When it became clear that, under such policies, private sector debt was unmanageable, the government gave up. Yes, it finally conceded, debt was indeed rising; but it declared that that was no concern of the government or the economy. Private borrowing and lending between individuals was just that — private.

The global financial crisis demolished that complacency. The reality could no longer be avoided. Once private sector debt threatened output and employment, it became incumbent on government to address the problem.

As Ms Gillard is finding out, large-scale financial bail-outs and interventions are a tougher sell than 30 years ago. In doing what they did, Hawke and Keating squandered much Labor goodwill. That is the legacy they left behind.

For a number of reasons, since Rudd’s time, the debate in Australia about the supposed link between anthropogenic carbon dioxide emissions and climate change has gone off the boil.

The failure of the Copenhagen conference is one of the reasons. Whatever the merits or otherwise of the arguments about climate change, the impression took hold that if the world could not agree on what needed to be done, what good could Australia do on its own?

One important point that Ms Gillard and her team seem to have overlooked is the link between carbon dioxide emissions and our international trade.

Should it ever get its own thinking clear on the matter, the European Union — one of our major trading partners — quite likely will require us to do something about our carbon dioxide emissions or else face border taxes if we want to trade with the EU bloc.

The EU certainly has signalled that intention. At that point, it won’t matter what we all believe; it will be a question of what might be forced upon us.

Rather than squander even more political capital on a misguided experiment, political common sense would suggest to Labor that it hold off until international trade realities force us to act.

Why it chooses the more politically difficult path is something of a puzzle.